HECM Saver

Last month Bloomberg published an article discussing the positive changes to the HUD Reverse loan program and how their image is beginning to be seen as not only positive but as a viable option for additional funds to manage retirement portfolios and extend those funds into the future.

By using a Reverse loan Line-of-Credit when funds are needed in a “down” market in lieu of withdrawals from a portfolio, possible tax consequences could be avoided and the funds left in place for later use when the market recovers.

Here is a copy of the summary of the article as it appeared in Reverse Mortgage Daily.

Bloomberg: Reverse Mortgages a Boon for Boomers
Posted By Jason Oliva On May 19, 2014

Last year’s program overhaul and newer research are helping reverse mortgages overcome stigmas of the past and become widely viewed as effective financial tools when planning for longevity, Bloomberg reports.

This combination of factors have transformed the perception of reverse mortgages from a “pariah in financial planning circles’and tools of last resort, to strategies for retirement planning, the article writes:

Recent studies on reverse mortgages have boosted their reputation in long-term financial planning, such as those conducted by John Salter, a Texas Tech University professor, CFP and occasional reverse mortgage researcher.

Using what they dubbed as a “standby reverse mortgage,, strategy, Salter and his colleagues revealed that the use of a reverse mortgage can improve the chances of financial sustainability of up to 30 years when based on simulated retirement portfolios.

In a “falling market,” the standby reverse mortgage was tapped rather than the individual’s portfolio, with the retiree repaying the money when the market recovers.

Under this strategy, which is based on a home valued at $250,000 and supports a 5% withdrawal rate, there is a 90% profitability of the money lasting 30 years, according to Salter.

The article also touched on recent research from Ibis Software CEO Jerry Wagner, which introduced the “6% rule” [3] when outlining the spending success of reverse mortgages.
Read more Ell at Bloomberg. Written by Jason Oliva..

Here is the final portion of the article that I shared in the two previous posts in this blog. As this article discusses, there are been several changes to the FHA Reverse loan program, effective in October 2013 that limit the amount of funds the borrower can receive but also include additional options.

“The three have done extensive research [2] on how the government-insured Home Equity Conversion Mortgage (HECM) product can be used as a retirement planning tool [3].

“Our study considers using a HECM Saver reverse mortgage as a risk management tool in conjunction with a two-bucket investment strategy, coined the standby reverse-mortgage strategy, in order to increase the probability a client will be able to meet predetermined retirement goals,” they wrote in a 2012 article published in the Journal of Financial Planning.

Since then, HUD has issued new rules for HECMs that limit homeowners from borrowing more than 60% of the maximum reverse mortgage loan amount when it closes for a one-year period, Investment News writes. The program changes are meant to ensure loans will cover borrowers’ ongoing expenses, in addition to other common uses such as improving cash-flow.

“A HECM is just another way we can help clients address their retirement income needs,” task force member Marguerita Cheng, a financial planner and chief executive of Blue Ocean Global Wealth, told Investment News.”

The obligation of a Financial advisor to their client, is to to guide them in their investments to develop a healthy portfolio of funds and also protect those funds from running out, by managing the account and providing guidance to the clients on an ongoing basis.

For many years, Advisors have felt that a Reverse loan defeats the purpose of protecting their clients’ assests and due to lack of knowledge about the FHA loan program and how they function, the Advisor would not consider them as an option to protect their client’s principle from being drawn down.

But recently an article was published in Financial Advisor magazine to the industry, about how they can utilize a Reverse mortgage to extend the life of their clients investments without any tax consequences. It is simply a matter of the Advisor being more open to learning about this unique federal loan program for seniors and what it could mean for their business in the coming years because the future of financial planning will be rapidly changing as the Boomers begin to consider retirement and new methods and options for financial planning will need to adapt to the changes as they appear.

I will be posting some comments in two parts from Reverse Mortgage Daily with the first one here:

Reverse Mortgages on the Verge of Financial Planning Breakthrough?
Posted By Elizabeth Ecker On April 18, 2012 @ 6:36 pm In News,Retirement,Reverse Mortgage | No Comments

An article [1] published Wednesday in Financial Advisor magazine demonstrates the way in which a reverse mortgage can preserve the portfolios of retirees who have investments. On the heels of another recent article written for financial planners on the same topic, it is beginning to sound like a sea change for the reverse mortgage industry and its work with financial planners.

Featuring an interview with nationally-recognized retirement expert Harold Evensky, the Financial Advisor article [1] details the Saver option for use by baby boomers who are planning for retirement.

“I’m reasonably positive [the Saver] will become an important part of our planning in the future,” Evensky told the publication.

Evensky and colleagues at Texas Tech have worked on a yearlong study on the use of reverse mortgages in retirement planning that is expected to be published soon. In speaking with groups of financial professionals about the research, Salter told RMD [2] he has received positive feedback from the planning community. In the meantime, Evensky says the studies indicate that use of the reverse mortgage Saver product will significantly increase the survivability of a retiree’s portfolio in retirement.

HUD has decided to extend the current lending limit of $625,250 for Reverse mortgages into the next fiscal year and that is very good news for everyone. There has been a debate about reducing the limit to the previous figure which was at $417,000 due to declining market conditions and if that had happened it would have had serious consequences for seniors and the Reverse loan industry.

If this had indeed occurred it would have been a serious blow to the senior community making it impossible for some to take advantage of the federal loan program because of the lower cap. Appraised values would have been capped at $417,000 instead of the current lending limit and if a senior has a large mortgage that needs to be paid off and depending on how much they could qualify for from a Reverse loan, they may not be able to do it and that would mean they would have to continue making mortgage payments that they may not be able to afford and put them at risk for foreclosure.

It is with a huge sigh of relief, to know that for at least another year we have the ability to continue to originate loans for seniors who need the higher lending limit to pay off large mortgages they may have on their property and eliminate their loan payment. And for the time being the higher limits will remain available but this could change next year and that’s why it’s important for seniors to explore this option now and not continue to wait and see what happens.

Following is an article that discusses this good news:

HUD Extends $625,250 HECM Loan Limit Through 2011

“The mortgage loan limit and max claim amount for for HECM loans will remain unchanged through December 31, according to a mortgagee letter issued today by the Department of Housing and Urban Development. ML 2011-29 specifies that the HECM loan limit of $625,500 will remain for all areas, including high-cost areas such as Alaska, Guam and the U.S. Virgin Islands.

“We’re glad to see FHA take this interim step. It eliminates uncertainty for loan applicants who might have been concerned about not getting their loans before the limits possibly dropped,” Peter Bell, National Reverse Mortgage Lenders Association president told RMD in an email. “Now, we need to focus on persuading HUD and/or Congress to retain this limit beyond calendar 2011.”

For forward mortgages, HUD states that the Federal Housing Administration will implement new single-family loan limits on October 1, which will reduce forward loan limits in the highest cost areas in the U.S., and will maintain current loan limits in most parts of the country.”

I am providing a copy of a short article that was recently published in the Chicago Tribune newspaper about the perception that reverse loans are a “last resort” for a senior who is short on money to pay for their monthly cost of living expenses. I have and continue to feel that, that term is insulting because it’s implies that the loan program is something dreadful and is the worst thing that a senior could do to themselves when in fact it can make the difference between living on the streets or remaining in their home.

However, the writer concedes that with the changes that have taken place over the years to the government program, there is more oversight and regulation in place to protect the Seniors best interests, plus they have become more affordable as well. And in many instances they have made the difference for a Seniors ability to survive and remain in their home and not rely upon their adult children for assistance.

Here’s the article:
A Chicago Tribune Q&A, “New Reverse Mortgage Opens Option for Seniors,” addresses reverse mortgages as a retirement option, and cites the Saver as a new choice for seniors considering a reverse mortgage.

“The question poses the financial problem of many seniors who are ”brick rich and cash poor,” and cites a case of an elderly widow with a $400,000 home she owned free and clear, but whose income was so low, she could not afford $2 Meals on Wheels payments.

“If reverse mortgages had been in existence then, it would certainly not have been a last resort. ‘Godsend’ would be more like it,” the question states. “She could have lived like a queen (albeit a modest one) for the rest of her life tax-free.”

While the author of the answer still says reverse mortgages are a “last resort,” he further says that new laws and the new FHA product are slowly changing his mind.’

‘Last year Congress increased the loan limits on reverse mortgages to $625,000’ he writes. ‘Additionally, the FHA announced a new version of the old reverse mortgage, the HECM (home equity conversion mortgage) Saver program. Although this new product does not allow homeowners to take as much money under the program as with the older version, the upfront closing costs are considerably lower. If you are 62 or older and have a house that is free and clear, or only has a small mortgage, you may be a candidate for this program.’ ”

A reverse loan is government insured and is a very safe option for any senior to considering using it to increase their cash flow and continue to own their property. Within the last several years more variations of the program have become available including a fixed rate making them just that more attractive as an option for money.

Anyone who is seeking information or is considering using one as part of their financial plan, should set an appointment for the counseling provided by HUD approved counselors and learn about the benefits of the program and let go of the misconceptions and negativity.

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Dear Lorraine, You began the process for me, the process of breathing again. We were both working our display booths at the Ventura County buildings; mine with the County Fire Department and you represented your advisory company. As you descibed the highlights of a Reverse mortgage to me, it dawned on me that this could be the answer to my problem, ie., how could I pay for my wife's medical condition. After that lucky meeting, I checked out your company & found out it was doing business with FHA & apparently doing so without trouble. I checked out 3 other similar agencies, all with similar track records. So- I stayed with my original choice and didn't regret it for a single moment. So I thank you once again and strongly recommend your company to any other seekers of a compassionate and willing helper. Sincerely, Raymond A. O'Grady Newbury Park, CA
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